Findings from research and studies conducted at the Financial Research Center (FSA Institute) are organized and published as Discussion Papers to stimulate further discussion and comment. Please send comments to: frtc_comments★fsa.go.jp (replace the star sign with @).
The views expressed in the papers are those of the authors and do not necessarily reflect the views of the Financial Services Agency or the FSA Institute.
Discussion Papers (FY 2022)
|Measuring Climate Transition Risk under a Delayed Transition: An Exploratory Analysis of the Japanese Banking Sector
Abstract | Full text (PDF:2.14MB)
|Financial Literacy and Households’ Consumption Behavior: An Empirical Study amid the COVID-19 Pandemic
Abstract | Full text (PDF:746KB)(Full text is available only in Japanese)
|Study on Planning and Implementation of Strategic Cybersecurity Measures for Financial Institutions
Abstract | Full text (PDF:1.91MB)(Full text is available only in Japanese)
|Standardization of Research and Methodology for the Analysis of Regional Banks’ External Environment
Abstract | Full text (PDF:699KB)(Full text is available only in Japanese)
|Behavior of Securities Firms and Utility of Investors, and Economic Growth
YAMAGUCHI Tomohiro, YAMASHITA Misaki and YOSHINO Naoyuki
Abstract | Full text (PDF:1.07MB)(Full text is available only in Japanese)
Measuring Climate Transition Risk under a Delayed Transition: An Exploratory Analysis of the Japanese Banking Sector
Jakob Thomae, Associate Research Fellow, Financial Research Center (FSA Institute)
We analyze the loan books of a sample of banks from the Japanese banking sector with regard to climate scenario alignment and exposure to climate transition risk. The Paris Alignment Capital Transition Assessment (PACTA) methodology is applied to the loan books to understand the exposure to climate-relevant technologies of the loan books’ counterparties based on a data base that contains company level production plans based on physical assets from a set of climate relevant sectors. We use PACTA to calculate production-based alignment of the analyzed loan books with climate scenarios. This helps identify the sectors, technologies and capital stocks that are on track for the low carbon transition of the economy and those that are not. We further apply the climate transition risk stress test designed by 2 Degrees Investing Initiative (2DII) which uses a unique approach modelling company profits based on company production data and production pathways from climate scenarios. We derive changes to future profits under a business-as-usual scenario and a set of late action shock scenarios that reflect on different degrees a delayed low-carbon transition. A Merton credit risk model is then used to identify potential vulnerabilities in the banking sector.
The analysis shows that Japanese loan books tend to be aligned with ambitious climate scenario targets only for a few sub-sectors (gas-fired power generation and hybrid vehicle manufacturing), whereas misalignment is identified for the remaining sectors covered in PACTA. This translates to some adverse changes in probabilities of default under late action scenarios. The sectors that need to decarbonize fastest and are currently most misaligned, tend to be most at risk of deteriorating profitability. This includes especially the coal mining and upstream oil & gas sectors, but also segments of the automotive and power generation sectors that rely on fossil fuels can be affected.
In absolute terms, the misaligned and most at-risk sectors do not constitute the largest share of the loan books, as the coverage of the analysis is restricted to some of the most climate relevant sectors. Furthermore, the analysis is based on loan books as of fiscal year 2020 and assuming static loan books. Thus, some improvements related to recent policy initiatives by the Japanese government and financial regulator may not yet be fully captured in the analysis.
Keywords: climate scenario analysis; climate transition risk; and stress testing.
Financial Literacy and Households’ Consumption Behavior: An Empirical Study amid the COVID-19 PandemicSEKITA Shizuka, Associate Research Fellow, Financial Research Center (FSA Institute)
Since 2020, the COVID-19 pandemic has impacted economic activity, and it is assumed that unexpected declines in income affected people’s consumption behavior. The full-insurance hypothesis indicates that if insurance markets in a broad sense are developed sufficiently, changes in the level of consumption can be avoided. This paper tests this hypothesis, using the micro data from “a survey on households’ financial behavior and perception amid the COVID-19 pandemic” conducted by Japan’s Financial Services Agency in March 2021 following a statement issued by the Organisation for Economic Cooperation and Development (OECD), “Supporting the financial resilience of citizens throughout the COVID-19 crisis.” This paper also analyzes how people deal with income declines, such as dissaving, borrowing, and/or income transfer. In performing analysis of these two aspects, we focus on the difference in the level of people’s financial literacy (i.e., the level of knowledge, behavior and attitude regarding finance and the economy). This is because people with higher financial literacy tend to have more savings and pass loan screening more easily when borrowing is needed, and therefore it is considered that they can avoid cutting consumption even when their income declines. As such, by recognizing the important role financial literacy plays, this paper then examines how financial education is being promoted in Japan, and makes policy recommendations for the future by outlining financial education policy in other countries.
Keywords: financial literacy (the level of knowledge, behavior and attitude regarding finance and the economy); full-insurance hypothesis; coping mechanisms; financial and economic education; and behavior changes.
Study on Planning and Implementation of Strategic Cybersecurity Measures for Financial InstitutionsSOGAWA Hajime, Research Fellow, Financial Research Center (FSA Institute)
Threats to cybersecurity have been growing in recent years. There are even cyberattacks in which the involvement of state-backed actors is suspected and those actors carried out the attacks after performing careful reconnaissance over a long time, using highly advanced techniques. Given that financial institutions hold a vast amount of personal information and financial assets, they tend to be targets of cyberattacks. In fact, there are many cases in which financial institutions suffered financial losses because of the attacks. Given the fact that financial institutions are highly exposed to cyber threats as described above, cyber risk management is one of the most critical issues for financial institutions’ business management. Nevertheless, it is difficult for financial institutions to swiftly implement consistent and comprehensive cybersecurity measures because cyberattacks are always changing. It is also because financial institutions’ numerous computer systems and various kinds of services are connected in a complex manner. This makes it very difficult for financial institutions to apply cybersecurity measures to every system and service. To help financial institutions take cybersecurity measures more effectively and efficiently, this paper outlines trends in cyber incidents that have struck governments and financial institutions and the recent cyber threat environment surrounding governments and financial institutions, and examines reports and guidelines that are useful for financial institutions when devising cybersecurity measures. The paper then analyzes cybersecurity measures that are necessary for financial institutions based on a literature review, and proposes detailed steps for financial institutions to plan and implement measures to continue enhancing security measures autonomously.
Keywords: cyberattacks, cybersecurity measures, and strategic planning.
Standardization of Research and Methodology for the Analysis of Regional Banks’ External EnvironmentASAI Yoshihiro, Associate Research Fellow, Financial Research Center (FSA Institute)
For regional banks other than those in metropolitan areas, there are concerns about diminishing number of borrowers as population declines in Japan. Meanwhile, financing situation of small and medium-sized enterprises (SMEs) have always been harsh compared to that of large firms. This implies that, if regional banks can lend sufficiently to SMEs that have financing needs, problems that both regional banks and SMEs face can be relieved at the same time. To examine this possibility, this study conducts an analysis using loan data and firms’ financial data in a certain region of Japan. The study reveals that regional banks started lending to small businesses to address their financing needs, and so the amount of loans are increasing. On the other hand, it is pointed out that financing needs of small businesses are not being met, and therefore it is possible that views regarding financing needs of small businesses and the role of regional banks vary from prefectures to prefectures. In a subsequent study, we need to identify by prefectures, whether regional banks are providing loans in the way that meet the financing needs of SMEs and also which type of regional banks are providing funds that address the financing needs of SMEs.
Keywords: regional banks; and SME financing.
Empirical Analysis of Regional Lending Market Using Matched Data of Financial Institutions and Borrower Firms
TSURUTA Daisuke, Associate Research Fellow, Financial Research Center (FSA Institute)
Demand for funds has been on a downtrend structurally in regional areas of Japan in recent years due to ageing and declining population. Against this background, a need to discover fund demands through promoting entrepreneurship and business succession is increasing. Recently, competition in regional lending markets seem to be strengthening with an increase in cross-regional lending by financial institutions that are headquartered in other prefectures to help their sluggish earnings. Noting such situation surrounding regional financial institutions, this study conducts an econometric analysis on regional lending markets using matched data of financial institutions and borrower firms of a prefecture in Japan. By using data on borrower firms combined with those of financial institutions, financial institutions’ lending stance can be shown quantitatively, as we can control firm-specific factors that cannot be observed and bank-specific lending capability. This study reveals what kind of regional financial institutions lend vigorously to what type of firms, focusing on profiles of firms such as profit rate, credit scores, leverage, and on profiles of financial institutions such as financial sector and business locations outside their headquarter prefectures.
Keywords: regional lending market; matched data of financial institutions and firms; financial institutions behavior; and cross-regional rending.
Behavior of Securities Firms and Utility of Investors, and Economic GrowthYAMAGUCHI Tomohiro, Professor, Institute for Data Science Education, Tokyo International University
YAMASHITA Misaki, Section Chief, Financial Markets Planning, Financial Markets Division, Policy and Markets Bureau, Financial Servcies Agency
YOSHINO Naoyuki, Director, Financial Research Center (FSA Institute) and Professor Emeritus, Keio University
In this article, we first examine empirically how assets are allocated from the perspective of investors’ behavior to maximize their utility. We then reveal securities firms’ behavior through data analysis. In conducting data analysis, we focus on fee income associated with stock transactions taking into consideration the features of findings we obtain from data analysis. In our theoretical model, we classify transactions into two types, namely transactions of relatively safe assets and those of riskier assets, and we indicate the proportion of transactions that maximize securities firms’ profits, with explicit inclusion of the difference in trading cost of the two types of transactions. Further, we calculate investment allocation that most increases economic growth from macroeconomic perspective, finding the ideal balance between investment in firms that are considered as relatively safe assets and investment in firms that are considered risky but growth is anticipated. We can conclude that Japanese investors have strong preference for safe assets in securities markets. While strong economic growth is being aspired, such investment stance of Japanese investors can result in low economic growth and we explain this using the macroeconomic production function. As not many prior studies have examined the issue of how funds allocation in securities markets can contribute to economic growth, we conduct empirical analysis to supplement examination of this issue.
Keywords: allocation of investment to safe firms and risky firms; securities firms’ behavior; and macroeconomic funds allocation through securities markets.